CMS Nomeco Congo Inc. and Nuevo Congo Co., US subsidiaries of independent Perenco SA, are fighting legal battles with potential to affect US oil and gas companies operating in countries that have defaulted on sovereign debt.
In a series of US federal court actions across Texas, vulture funds are trying to collect defaulted debt of Congo (Brazzaville) by laying claim to royalty oil through garnishment of third parties, in this case the Perenco units.
So-called vulture funds buy a developing nation’s defaulted debt for pennies on the dollar and then seek to collect full payment. Some of the funds call themselves specialists in asset recovery from problematic emerging markets.
Chevron Corp. filed a brief in the CMS appeals case noting that its subsidiaries face similar efforts in the US District Court of the Northern District of California.
The potential burden of protracted garnishment litigation could discourage US companies from pursuing international ventures, Chevron said.
In addition, other nations could become reluctant to provide US oil companies access to oil and gas investment opportunities if garnishment actions become commonplace, attorneys for both CMS and Chevron said separately.
CMS Nomeco
A US District Court in Houston ruled Apr. 5 that vulture fund FG Hemisphere Associates LLC of New York can garnish Congo’s royalty oil and the oil entitlement share of the national oil company, Ste. Nat. des Petroles du Congo (SNPC), through CMS Nomeco, the operator.
Congo courts have ruled the royalty oil is the property of the country and have ordered that lifting by the government proceed of a cargo aboard a tanker in Congolese waters.
CMS, which produces oil from Yombo field off Congo, appealed the Houston court’s decision to the US Court of Appeals for the 5th Circuit in New Orleans, said attorney Andrew B. Derman of Thompson & Knight LLC.
The Houston court ordered CMS to post a bond for the value of the royalty oil, Derman said, adding this situation amounts to “trapping CMS between US and Congo court orders and exposing CMS Nomeco to double liability for the value of the oil.”
FG Managing Director Keith Fogerty said his company has a valid order from a Texas court that says CMS owes a debt to Congo, and under Texas law, that is garnishable.
“If you do business in those types of places in the world, you have to accept the consequences,” Fogerty said. “This is not a case of an innocent third party. This is someone working hand in hand with the illegitimate government of the Congo to defeat a lawful garnishment claim.”
Garnishment cases against Perenco’s subsidiaries are complicated and involve federal courts in Austin, Dallas, and Houston, Derman said. Perenco has spent “millions” of dollars in litigation costs, he said, refusing to be more specific.
The cases involve an undisputed Congo government default on a highway construction loan from the 1980s, Derman told participants at the American Association of Petroleum Geologists annual convention in Houston on Apr. 12.
Perenco acquired CMS Nomeco in 2002, a year after a vulture fund started trying to collect oil proceeds from CMS Nomeco. Eventually, Perenco also acquired Nuevo Congo assets after Plains Exploration & Production Co. bought Nuevo Energy Co. in 2004.
Immunities law
The legal arguments hinge on whether Congo’s royalty oil is protected as its property under the Foreign Sovereign Immunities Act (FSIA) and whether it can be garnished.
The appellate court’s 2004 ruling on behalf of Af-Cap Inc., another vulture fund, said Congo’s royalty can be garnished in the US, Derman said.
Meanwhile, Congo courts last year ordered CMS to honor SNPC’s contractual right to lift the government’s royalty oil on time, regardless of US court decisions and the garnishment writs. Congo refuses to recognize US court actions, Derman said.
“The issue today is vulture funds are trying to collect SNPC’s share of oil from US oil and gas companies,” Derman said.
More than 70 nations throughout Africa, Latin America, Eastern Europe, and Asia have defaulted on sovereign debt, he said, adding that many US companies have investments in these countries.
“If the decision of the US federal court is upheld, US companies operating abroad will be at the mercy of vulture funds,” Derman said. “There are three critical issues that American companies will encounter if this continues: fear of investing abroad, negative effects on international debt restructuring, and US laws may have to change.”
In the meantime, he said, “Every US company doing business with nations that have defaulted sovereign debt or may default in the future are put directly in harm’s way by the vulture funds’ attempts to use US garnishment law to collect on the paper they bought for pennies on the dollar.”
Chevron’s brief
In a brief filed in the CMS case, Chevron said US companies having international operations could find themselves in protracted and costly efforts brought by creditors holding sovereign debt.
“This result will substantially and adversely impact American companies in their efforts to develop foreign mineral resources and will subject them to burdensome and intrusive litigation to collect debts,” the Chevron brief said.
The oil companies, which have no connection with the underlying debt, find themselves as garnishees and are pulled into “limitless garnishment litigation,” Chevron said.
In California, Chevron has responded to three separate proceedings involving Af-Cap garnishment efforts. The oil company said it incurred almost 3,000 attorney-hr over 3 years “at substantial expense.”
Previously, Murphy Exploration & Production Co. International was a defendant in a garnishment case involving Congo (Brazzaville).
The 5th Circuit in December 2004 dismissed that case, which was filed by Walker International Holding Ltd. against Murphy about its signing bonuses.
FG arguments
Fogerty said Congo’s government oil accounts are in question.
“Congo is one of the most predatory, bad regimes in the world where the elite are stealing money left, right, and center. And as all of us know, you can’t steal that type of money without the cooperation of all different kinds of people,” Fogerty said. “Now I’m not suggesting that Perenco is helping them steal that money, but our auditing of the Congo oil accounts shows that somewhere between $500 million to $1 billion has disappeared, probably over the last 5 years.”
Forgerty said, “Our argument is that they [Perenco] are colluding with Congo to try to defeat the court orders. They are not third parties. They are partners who are knee deep in it.”
He added that Congo recently incarcerated two human rights activists who were pointing out the discrepancies in the country’s oil accounts.
Brice Mackosso, of the Congolese Justice and Peace Commission, and Christian Mounzeo, of the Rencontre pour la Paix et les Droits de l’Homme, who act as coordinators of the Congolese PWYP Coalition, have been held in Congo since Apr. 7 on civil charges.
Their detention is said to be linked to their campaign for greater transparency in the management of Congo’s oil revenues. ✦